Young couple looking over their finances.

Finding yourself with extra cash is a good problem to have. Still, when you find yourself with a surplus, there is a decision to be made. Does it make the most sense to pay off debt? Is it more advantageous to put the money to work in investments? Or should your extra money go into savings for retirement or other future goals?

Pros and Cons of Focusing on Only Debt

Paying off debt (or significantly paying down debt) is a satisfying accomplishment. Going into the future debt-free can be freeing. If you have high-interest credit card debt, eliminating that first will save you money long-term. You’ll save money on interest, however, if you pay your debt first and put no money toward the future, you’ll have nothing but credit cards to fall back on if you have a financial emergency. Then you’ll be back to square one.

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Pros and Cons of Focusing on Only Saving and Investments

If you put money into savings or towards investments first, you’ll continue to pay money in interest on your debt. Going into the future with debt can reduce your borrowing power for home, school, or car loans, and entering retirement with debt is risky.

"However, if you have some debt with lower interest rates, such as a mortgage or student loan, it may make sense to put most of your money into your emergency fund. If you have any interest free loans, having this extra money work for you by earning interest will be the better strategy," advises debt elimination strategist, Jeff Mohlman. In addition, if you delay saving for the future until your debt is gone, you are hindering time for your savings to grow. This is a big consideration when thinking of retirement.

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Looking at Short-Term Financial Goals and Long-Term Financial Goals with a Blended Approach

How you can best make your money work for you is dependent on your individual situation. For most, short-term financial goals include paying off (or down) debt and funding an emergency account. Long-term financial goals include retirement planning, saving for the down payment on a new home, or saving toward education. In many cases, the blended approach is the smartest way to go. For example, it may make sense to pay off any debt with a high interest rate while funneling the rest into savings. If you have little high-interest debt and a fully funded (or close to fully funded) emergency savings to last 3-6 months, investing and having the money begin earning for you is a smarter choice than paying off “good debt”.

When it comes to making the smartest choice for an influx of cash, speaking with professionals is a good first step. The financial consultants at Safe Money Partners can look at your financial picture, analyze your short term financial goals and long term financial goals, and come up with a plan that puts you in the best position based on your unique financial goals, needs, and budget. Contact us today to learn more!

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